The Mitigation Contribution under Article 6: key understandings and what it means for the VCM

Below is the text itself (bold font added), which forms part of the Decision on Article 6.4, the new carbon crediting mechanism that the UNFCCC will operate:

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The [Article 6.4] mechanism registry shall track:

(a) A6.4ERs authorized for use towards achievement of NDCs and/or for other international mitigation purposes pursuant to paragraph 42 of the RMPs (authorized A6.4ERs);

(b) A6.4ERs not specified as authorized for use towards achievement of NDCs and/or for other international mitigation purposes (mitigation contribution A6.4ERs), which may be used, inter alia, for results-based climate finance, domestic mitigation pricing schemes, or domestic price-based measures, for the purpose of contributing to the reduction of emission levels in the host Party.

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There are three important elements of this text.

First, it provided a name for Article 6.4-issued credits that are not authorised for use towards NDCs or for other international mitigation purposes. In other words, credits for which the host country will not apply a corresponding adjustment. This name is ‘mitigation contribution A6.4ERs’.

This name matters as the term ‘contribution’ is closely associated with the debate over the past few years about whether credits that count towards a host country’s NDC can be used to ‘offset’ a buyer’s emissions, or if the buyer should instead make a ‘contribution claim’, sometimes described as a ‘financing claim’. It is not unreasonable to read the fact that governments included this word – and indeed the fact that they decided to name the units at all – as an intentional act, in particular when combined with a reference to these credits having the purpose of ‘contributing to the reduction of emission levels in the host Party’.

The second is the explicit inclusion of three possible use cases for ‘mitigation contribution A6.4ERs’: results-based climate finance, domestic mitigation pricing schemes, or domestic price-based measures. These are all examples that are widely considered as reasonable uses of credits that will contribute to emission reductions in the host country. It is notable that governments decided – and were able to agree collectively - to spell out this list of possible use cases. It is also notable, in our view, that the list did not include ‘offsetting’.

At the same time though, the text includes an important term: ‘inter alia’, meaning ‘amongst other things’. This addition means that users of mitigation contribution A6.4ERs are not solely confined to the use cases that are explicitly spelled out but seem able – unless this is later ruled out at a national level or under other frameworks - to claim these credits towards other uses.

And a final point of clarification: the decision at COP27 does not create a ‘new type of credit’, as some have stated. The fact that the new crediting mechanism established by Article 6.4 will include both credits that will be correspondingly adjusted by their project’s host country, and credits that will not be adjusted, was built into the rules and modalities adopted at COP26, as we explained in our post-COP26 reflections. Read post-COP26 reflections

What does this mean?

It seems safe to assume that this paragraph represents a compromise between different governments, with some wanting the decision to specify a set of defined use cases and to rule out the use of non-adjusted credits for offsetting, and others wanting it to leave the door open. So, if the text is difficult to interpret - and is potentially contradictory - that is likely to be because it embeds quite different views from different Parties.

So, what should market actors do with this paragraph, and what are its implications?

1. Signalling if not directing. The text is not, as explained above, definitive on the use of non-adjusted credits. But one has to work hard, in our view, to overlook the intention by at least some Parties to direct voluntary use of these credits towards claims to have contributed to reduced emission levels in the host Party, and not claims to have offset. In our view, this marks a shift from the decisions at COP26, which created the option for credits that are correspondingly adjusted to be used in the voluntary market (alongside those that are not adjusted) but did not provide any obvious signal or judgement on how these are used or claimed.
    
2. Limits to international negotiations. It is, in a way, surprising that a decision adopted by nearly all governments globally was able to go so far as COP27 did to define and direct the use of non-adjusted credits. But even so, the outcome – and the inclusion of an ‘inter alia’ - affirms that there are limits to how far the UNFCCC will be able to go to resolve the debate on whether and when corresponding adjustments are required in the voluntary market. If clarity is to be provided, it seems likely it will be from sources outside the UN level. See Claims Guidelines on our Standard Repository This may be through regulations or guidance introduced by national governments: either a host country with respect to credits generated in its jurisdiction, or a country in whose territory companies are making public claims about the use of carbon credits. We have live examples of regulators looking at the carbon market, such as the International Organisation for Securities Commissions, which launched consultations during COP27. It may also come through multi-stakeholder initiatives like the Integrity Council on the Voluntary Carbon Market (IC-VCM) or the Voluntary Carbon Market Integrity Initiative (VCMI). Gold Standard produced guidance earlier this year in our revised Claims Guidelines and the Nordic Dialogue on Voluntary Compensation published its own guidance earlier this month. See Harnessing voluntary carbon markets for climate ambition An action plan for Nordic cooperation
    
3. Relevance beyond the UN. The definition of non-adjusted credits under the Article 6.4 mechanism as ‘mitigation contributions’, and the set of specified use cases for these credits, has no direct bearing on independent programmes like Gold Standard and the credits that we issue. Yet it would be naïve to think there are no wider implications from this decision. This text reflects the views of governments on the nature of credits, and it would be unusual for them to hold a different view on a credit issued by Gold Standard to the view they take on one issued by the Article 6.4 mechanism. Like other decisions about the design of the Article 6.4 mechanism, it feels sensible to take this as a norm that will have a bearing on independent standards and the market in general, even if it imposes no direct requirement.
    
4. Implications for claims, not quality. Finally, there is an important point to keep in mind when considering the difference between adjusted and non-adjusted credits under Article 6.4 decisions: the only thing on paper that separates them is whether or not the host country has agreed to apply a corresponding adjustment. Both types of credits are subject to the same requirements for additionality, the same methodologies, the same monitoring and verification procedures, and the same safeguards. In other words, nothing on paper makes a non-adjusted credit of lower quality than an adjusted one. It is possible that host countries will agree only to apply corresponding adjustments for projects with higher mitigation costs – ‘higher hanging fruit’ – which may as a result be considered ‘more valuable’. But it would be wrong to dismiss non-adjusted credits as lower quality, and indeed there are a comprehensive set of requirements to ensure all credits have the same levels of integrity and impact.

This final point is perhaps the most important: Article 6 has established two types of credits (adjusted and non-adjusted) that can be used in the voluntary market, and we need both.

At Gold Standard, we are working with governments who see the voluntary market as an important source of carbon finance to achieve their NDCs, with public finance from developed countries and multilateral development banks still lagging behind commitments.

We are also working with governments who see the voluntary market as a means to go further than their NDCs, drawing international investment into sectors and activities that go beyond the nearer-term ambitions of the government – and ultimately help close the gap between the ambition of current NDC targets and the emission cuts required to achieve the Paris Agreement’s temperature goal.

There is an important question about the claims these different carbon credits can be used towards, to uphold the credibility of both the claim and the voluntary market more generally. However, through the work that lies ahead to bring further clarity on this question, we – and in particular the buyers - should not lose sight of the importance and value of both supporting countries to achieve their NDC and catalysing activities that go beyond NDC targets. Both are critical in reaching a climate secure and sustainable future.